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Aon HewittRetirement and Investment

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon company.Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Retirement and Investment Webinar SeriesApril 22, 2015

Aon HewittRetirement and Investment

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon company.Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Benefits of Customizing DC Fund Line-UpsAon Hewitt Panel:• Kevin Vandolder, CFA, Partner, DC Client Practice Leader, Retirement and Investment• Bill Ryan, Associate Partner, Retirement and Investment• Clint Cary, CIO and Head of US Delegated Investment Solutions, Retirement and Investment• Heather Tredup, Associate Partner, Retirement Communications Best Practices Leader

Aon Hewitt | Retirement and InvestmentProprietary & Confidential | 2015Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon company. 3

Agenda Tracker

Section 1 Our vision of what a DC investment line-up may look like in the future

Section 2 Aligning governance in a DC plan to improve outcomes

Section 3 The best ways to communicate to participants about funds and investing

Section 4 Questions & Answers


Current DC State of Affairs

Issues facing participants and sponsors

Participants are not on track– Insufficient annual saving– Growing financial needs – Not investing properly, can be overwhelmed by choice

Plan investment menu not meeting needs– Too many funds– Suboptimal diversification– No market consensus on glide path construction

Sponsors seeking more help – Cannot afford greater contributions– Reduced risk– Improved governance– Understanding fees


Two Potential Paths to Success

Participants (34%)* Fully hand the keys over to an

investment professional

Sponsors (56%)** Select and monitor an Expert***

who implements the Plan’s investment strategy

Focus time on strategic design considerations

DelegateParticipants (66%)* Build their asset allocation

Sponsors (44%)** Retain decision-making rights Closely connected to participant

investment needs

Empower Me

Institutional Scale

Best-in-Class Investments

Risk Management

Financial Security

*Percent fully invested in premixed portfolios from Aon Hewitt’s 2014 Universe Benchmark** Source: ai-CIO.com; 2012 Survey.***Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. an Aon Company and SECregistered investment adviser.


Agenda Tracker






Our Vision for a Defined Contribution (DC) Plan Investment Line-Up

Inflation

Lifetime Income Solution


Defining Asset Based Options

What is an Asset-Style Fund? Asset-Style funds provide micro level categories

What is an Asset-Class Fund? Asset-Class funds provide categories to simplify the investment menu by combining Asset-Style funds

US Large Cap

Growth

US Large Cap

Blend

US Large Cap

Value

Large Cap GrowthLarge Cap Value

Large Cap Blend

Vendor’s Large Cap Equity Fund


Defining White-Label Options

What is a White-Label Fund?

Custom-named funds that have no reference to a fund company

Constructed as either a single manager or as a portfolio of multiple managers

Not a new approach, as some plans have used it for decades

Reasons Sponsors are changing to White-Label structures* :

– 71% to combine multiple managers– 64% ease of changing managers– 57% ease of participant communications – 43% lower total fund fees

Large Cap GrowthLarge Cap Value

Large Cap Blend

XYZ Large Cap Equity Fund

*Aon Hewitt’s 2014 Retirement Pulse Survey


Defining Objective-Based Options What is an Objective-Based Fund? Objective-Based funds are multi-asset class core line-up funds.

Professionally designed portfolios targeting participant’s key risk management objectives

– return shortfall

– capital market volatility

– unexpected inflation

– longevity

For example, the Growth fund is a fully diversified return-seeking option to guard against return shortfall.

Real Estate

Global Equity

Hedge Funds

GlobalEquity

RealEstate

Hedge Funds

XYZ Growth Fund

Asset Class Building Blocks


Large Cap ValueLarge Cap IndexLarge Cap Growth

Small/Mid Cap ValueSmall/Mid Cap CoreSmall/Mid Cap Growth

Non-US ValueNon-US IndexNon-US Growth

High-Yield BondsGlobal REITOther Specialty Funds

Core BondCore Bond Index

Real Estate

Stable Value/Money MktOther Low-Risk Fund

The Evolution of DC Investment Menu Design

Asset-style menu Asset-class menu Objective-based menuBEST PRACTICEBETTERCURRENT

Large Cap

Small/Mid Cap

Non-US Equity

Hybrid Equity

Core Plus Bond

Capital Preservation

Inflation

Growth

Income

Capital Preservation

Inflation


Why is Objective-Based Tomorrow’s Fund Menu?

Participants agree smaller menus are better

Objective-Based funds reduce a menu from 20 Asset-Class funds to 4 diversified multi-asset class funds

Simpler choices with the same or even more asset-classes

60%

62%

64%

66%

68%

70%

72%

74%

2-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41-59

Number Funds Offered

Par

tici

pat

ion

Participation Rates Versus Number of Funds Offered

*Iyengar, S.S., and W. Jiang. 2005. The Psychological Costs of Ever Increasing Choice: A Fallback to the Sure Bet. Journal of Personality and Social Psychology

*


Participants’ Cost for Suboptimal Asset Allocation

Suboptimal diversification cost more than 50% of the participants at least 30 bps of performance.

The 30 bps performance loss over a participant’s career could cost them 0.7x of final pay

*Source: Aon Hewittt

4%

5%

6%

7%

8%

9%

0% 5% 10% 15% 20% 25% 30%

Expe

cted

Ret

urn

Expected Risk (Volatility)

Participant Portfolios Target Date Fund*


Custom Target Date Funds

2013 DOL Target Date Fund (TDF) Guidance*

1. Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan

2. Understand the fund’s investments allocations to different asset classes (stocks, bonds, cash)

3. Review the fund’s fees and investment expenses

*2013 U.S. Department of Labor Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries


“Institutionalization” of Defined Contribution

Case Study 1Plan Size $13 billion

Change • Custom target date funds• Passive tier• Active multi-manager options• Brokerage window

Impact Fee savings of ~10 bpsBetter expected alpha


Change • Reduced options from 22 to 16• Replaced some mutual funds with

passive index funds and custom strategies



Change • Custom target date funds with alternative investments

• Core options have 4 Objective Funds


Case Study 4Plan Size $1.3 billion

Change • Reduced options from 22 to 16• Changed “bundled” relationship with

record keeper to use best-in-class investment managers

Impact All in fees reduced from 42 bps to 19 bpsBetter expected alpha


Agenda Tracker






The fiduciary governance process is the #1 responsibility for sponsors and committees. It is a balancing act to:

– Improve participant’s retirement readiness without increasing spend – Stay on top of compliance with fewer resources – Be proactive about the plan while navigating all angles of risk

Committee, Corporate and Advisor Roles– Fiduciaries have personal liability– Not an “honorary role”

• Process is key• Considerations and

commitments– Serve as a fiduciary to the plan,

not representative of the firm

“Prudent Expert” Expectation– Prudent process documentation

– Act as an expert would, or hire one

– Always have a thoughtful response to “why”

Committee

Governance: “Highest Standard Under the Law”

Plan Design

Plan Investments

Plan Document

Plan Admin


Sponsor vs Participant View of Investment Decisions

FeesPerformance Outcomes

Sponsor View

Outcomes

PerformanceFees

Participant View


Custom enables better alignment of governance to the experts

Asset Allocation

Res

pons

ibili

ty

Skill

Participant

Sponsor

Advisor

Objectives menu engages participants in their comfort zone to achieve their desired outcomes


Aligned Responsibility and Accountability with Experts

Sponsor• Assemble team• Advocate for participants • Oversee fiduciaries• Set strategy goals and objectives• Monitor progress to goals

Advisor• Construct investment menus • Select / replace managers• Allocate to asset classes• Manage dynamic portfolios

Manager• Select securities• Manage risk• Trade portfolio

Participant • Set goals and risk preferences• Invest according to objectives

ParticipantAdvisor

• Provide financial plan• Advise on investment selection


Source: Financial Engines and Aon Hewitt study Help in Defined Contribution Plans: 2006 through 2012

Professional Help Can Be Effective


Delegated Solution Decide on investment structure Maintain an Investment Policy Statement Review Delegated consultant’s performance Report committee activity to the Board

Consultant takes on fiduciary responsibility as defined in ERISA 3(38), primary and independent responsibility for its work.

The Committee’s responsibility:to prudently select the Consultant and periodically monitor its work.

401(k) Fiduciary Committee’s Responsibilities

Traditional Approach Hire advisors and administrators Decide on investment structure Maintain an investment policy statement Select investment products Monitor investment product performance Determine when to change investment products Take action upon emergency events (e.g., turnover) Review investment product performance Set quarterly meeting agendas and topics Arrange fiduciary training for Committee Report committee performance to the Board Draft and maintain meeting minutes Evaluate fees Review participant usage of the investment menu

Reducing Committee Risk


Participant-Focused Fee Structure

Scale reduces fees for participants

Moving to fixed fees and greater transparency for participants

Low cost passive funds are core to investment success

Further scale growth drives participant fees even lower

Fixed fees maintain low cost solution

As balances grow, value of passive savings grows

Most plan assets invested in retail priced mutual funds

Most administration costs increase with assets

Active management creates fee budget for revenue sharing

Investment Scale

Fixed Costs

Investment Philosophy

Industry Today Tomorrow


+ 18% very likely to

Making administration fees more equitable*

Over a full career, changing from a percent of asset fee to a flat fee can increase the retirement account by more than

Example assumes a flat fee of $50 per year versus an annual charge of 0.25 percent of assets. Investor’s starting salary is $75,000 with 3% salary growth, 6% deferrals, 6% match, and asset growth of 8% per year. Investment horizon is 40 years.

24%

$200,000

Delivering Equity and Long-Term Value

*2015 Hot Topics in Retirement Survey


Agenda Tracker






Communication Considerations When Customizing

Future changes to funds are easier to handle

Future changes to funds become a non-event

Tools and education are often asset- or objective-based

Tools and education are often asset- or objective-based

Participants need to be better diversified

Participants are confused by too much choice

Initial change requires mapping and/or election

Change requires understanding and possible action

Ongoing, encourage participants to look at their investment choices in a new way

Ongoing, participants need education, tools and resources

Plan Sponsor Participant


The Participant Perspective

What type of investor are you?

Delegate Empower Me

While considering factors that may apply:• Brokerage window• Passive vs. active

management• Auto rebalance• Others…

I create a diversified portfolio via a Target Date Fund

Professionals manage the Target Date Fund over time

I select Managed Accounts

Account professionals create and manage my diversified portfolio with my input

I create a diversified portfolio via available investment options

I manage my portfolio over time


Encouraging Diversification: Three Steps to Success

Engage Show a Path Offer Resources

Your people are busy. Capture their attention.

Most people crave a simple solution. Help them find it.

Some want more information. For them, provide the details.


Agenda Tracker






Aon Hewitt’s best thinking in defined contribution investment line-up design

Hypothetical DC Investment Line-Up Solution

Retirement Income Solution Fund2015 Retirement Solution2020 Retirement Solution2025 Retirement Solution2030 Retirement Solution2035 Retirement Solution2040 Retirement Solution2045 Retirement Solution2050 Retirement Solution2055 Retirement Solution2060 Retirement Solution

GrowthIncomeCapital PreservationInflation Protection

Evolution of Defined Contribution Investment Structures

Make it easy. Give me a few simple choices. Actively manage my future.

OBJECTIVES MENUCUSTOM TARGET DATE MENU SELF DIRECTED BROKERAGE


Questions and Answers


Aon Hewitt’s best thinking in defined contribution investment line-up design

Hypothetical DC Investment Line-Up Solution

Retirement Income Solution Fund2015 Retirement Solution2020 Retirement Solution2025 Retirement Solution2030 Retirement Solution2035 Retirement Solution2040 Retirement Solution2045 Retirement Solution2050 Retirement Solution2055 Retirement Solution2060 Retirement Solution

GrowthIncomeCapital PreservationInflation Protection

Evolution of Defined Contribution Investment Structures

Make it easy. Give me a few simple choices. Actively manage my future.

OBJECTIVES MENUCUSTOM TARGET DATE MENU SELF DIRECTED BROKERAGE


Upcoming Events and Contact Us

Stay tuned for the next webinar in Aon Hewitt’s Retirement and Investment Webinar Series.

Details will be available on line at aonhewitt.com/retirement.

Contact UsFor any additional questions, please contact us at [email protected]


Aon Hewitt Panel

Kevin VandolderCFA, Partner, DC Client Practice LeaderRetirement and Investment [email protected]

Bill RyanAssociate PartnerRetirement and Investment [email protected]

Clint CaryHead of US Delegated Investment Solutions, CIO Retirement and Investment [email protected]

Heather TredupAssociate [email protected]

Contact List


Legal Disclosures and Disclaimers

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.

This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.

© Aon plc 2015. All rights reserved.


About Aon Hewitt

Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information, please visit aonhewitt.com.

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